Advocacy

What's the Chained CPI?

Bottom line: Cost-of-living adjustments for Social Security would be lower with the chained CPI than with the "plain" CPI

by Kim Keister, February 2013|Comments: 0

What's the difference? Here's the difference: The initially small benefit reduction between the plain CPI and chained CPI amounts to large losses down the road. — Jose Luis Pelaez, Inc./Blend Images/Corbis

En Español | The acronym is easy: CPI stands for consumer price index, a formula that looks at how the prices of stuff we need (food, for example) change over time. It's used to make cost-of-living adjustments in programs such as Social Security, veterans benefits and food stamps.

The chained CPI is a twist on that: It measures living costs differently because it assumes that when prices for one thing go up, people sometimes settle for cheaper substitutes (if beef prices go up, for example, they'll buy more chicken and less beef).

Bottom line: Cost-of-living adjustments would be lower with the chained CPI than with the plain old CPI. So depending on which formula is used, the amount of your Social Security payments could change over time.

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How much could payments change? Estimates show that under the chained CPI, your cost-of-living adjustment (COLA) would be about .3 percentage point below the plain old CPI. That works out to $3 less on every $1,000, which doesn't sound like much — except that it keeps compounding over time.

Look at it this way: The COLA for this year was 1.7 percent. If your monthly Social Security check was $1,250 last year, it increased to $1,271.25 this year.

With the chained CPI, you would be getting $1,267.50 — or $3.75 less a month and $45 less a year. Again, that might not seem like a big reduction, but if the COLA is the same next year, the difference increases to $7.61 a month and $91.32 for the year.

You start to get the picture. The gap accelerates and begins looking like real money. If you're 62 and take early retirement this year, by age 92 — when health care costs can skyrocket and more than 1 in 6 older Americans lives in poverty — you'll be losing a full month of income every year.

If you want to learn more, the AARP Public Policy Institute has done a deeper dive on the chained CPI.